Friday, 29 May 2015

Benchmarking on the outliers.

There is often a big disconnect between what people expect to receive an what they actually receive. Management or client relationship attempts to stick an elastoplast over this difference is called ‘expectation management’. In the case of pricing financial trades a client will expect their fill to be at the market price and the stresses involved in managing expectations between what rate they expect and the one they receive are legion. But what is the market price?

Imagine a huge fruit market with all 1000 stalls selling oranges. There will be an average price at which they are all willing to sell oranges and it would be reasonable to expect that average to be the price you are content to pay and also a reasonable price to quote as the representative price of oranges at that market. Yet amongst all of those stalls one of them will have the best selling price and one will have the best buying price. So the best bid and offer are not representations of the average market price but instead are the extreme outliers of the price distribution only representing 1/1000 of the market.

Both the best bid and offer suffer ‘The Winner’s curse”

"The winner's curse is a phenomenon which can occur in common value settings—when the actual values to the different bidders are unknown but correlated, and the bidders make bidding decisions based on estimated values. In such cases, the winner will tend to be the bidder with the highest estimate, and that winner will frequently have bid too much for the auctioned item".

Expand that logic to the financial markets with millions of participants and we can see just how misrepresentative of the average market bid or offer those best bids and offers are. Yet everyone seems to expect to be able to deal their amount of interest on them and any deviation is a rip off.

It’s as if in that fruit market, someone turned up and demanded that as Manuel in Saville was giving away 3 oranges free from his bumper crop then the market should be expected to supply free oranges too, or at least the market stall owner expected to drive down to Spain at their own expense to buy those 3 oranges, drive back and hand them free to the demanding customer. Good luck if you try that at your local supermarkets, but that is a regular expectation in financial markets.

When it comes to benchmarking the absurdity goes one stage further with clients expecting to deal on the average of the best bid and best offer - the mid price. As we have just seen, the best bids and offers are the last extreme of the distribution of all bids and offers so the mid must therefore lie outside the universal set of dealable prices. Yet the mid is expected to be provided as the dealt price.

How refreshing it would be if instead of picking these extremes of the distributions for benchmarking we should average all the prices that the market is willing to sell at and the average of all the prices that everyone is willing to buy at to produce an average bid and an average offer. Absurd? Well it happen with all other statistical sampling methods. The Consumer Price Index doesn’t take the highest or lowest price to work on from all their samples.

This can be averaging order boards. Sum(Volume x Price) / Total Volume of order book to give the average volume weighted price of the bid side and the same for the offer. Repeat for all market participants (including all those Bureau de Change 30% spread prices) and your benchmark exchange rate suddenly moves from one of dealing impossibility to one of real world actuality.

What is more, fund managers would be absolutely delighted as not only do they have constant slippage against an unachievable benchmark, they now have a very good chance of outperforming it.

Now whilst I am proposing a mad logic testing alternative that I really can’t see happening, the key point I am trying to make is that the best bid and offer are not representative of the average of the market. They are virtual particles flitting in and out of existence at the very end of a huge distribution curve and to use them as benchmarks pretending that they represent reality is nuts.

Wednesday, 27 May 2015

If FIFA were a bank

If FIFA were a bank -

It would make BCCI look like a charity.

Sepp Blatter would have to move to a regulatory environment under which his business practices would be accepted, such as North Korea.

Footballers would have their pay capped at £120,000 a year (no, not a week).

Performance bonuses would only be paid if the team did not get demoted during the following five years.

All conversations and communications would be recorded and monitored

   a) On the field.
   b) In the dressing room.
   c) During all transfer negations.
   d) Between all FIFA members at all times - phone, email, speech and sign language.

The backs would not be allowed to tell the forwards that they had the ball in case it influenced the forwards' behaviour for personal gain, such as running forward getting ready to score a goal - which would put the competition at an unfair disadvantage.

All passes would have to be made through a central exchange and/or reported to the authorities within 15 minutes.

Football players would never be allowed to play football again if they committed a foul.

All players would have to present a passport and two copies of recent utility bills to the opposition to prove who they are.

Each kick of the ball would have to be cleared by the referee before the kick is made.

Football clubs would be subject to misselling regulation resulting in managers being refreshingly realistic during their prematch interviews or paying huge compensation claims to those they deceive, spawning a new wave of spam texts from dodgy companies wanting to claim on your behalf.

FIFA board members would be liable to prison sentences if anyone under them in the organisation breached the rules and managers would be prosecuted if their players committed fouls.

Sepp Blatter would be personally responsible for all actions by anyone in the world of football.

Diving (spoofing) would be a criminal offence and extradition warrants honoured to the US, even if a UK player in the Hounslow Village 7ths only tripped on the way to the game.

There would be constant complaints about the lack of women at high levels in football.

Fines for football related misdemeanours would be at $235bio and make up a sizeable part of government revenue.

Football clubs would have to pass stress tests and prove they could still win if all their key players were injured at the same time.

Everyone associated with football would be hated by society no matter what their involvement.

Football clubs would be expected to provide football matches to fans at cost.

A general football levy would be payable by all football clubs in the UK to compensate for the public supporting them.

Football clubs would be allowed to fail. Clubs going bankrupt would lose their name forever and not be allowed to play again. Ever.

Friday, 22 May 2015

2015 A Bank Odyssey

Having just seen that banking fines have reached $235bio, my mind turned to the power that regulators have to apply almost randomly large fines over an industry where the fines themselves rarely make it to compensate the aggrieved parties. The regulating machine is beginning to remind me of HAL in 2001 a Space Odysey. So with that in mind here are some famous lines from the film but between Dave and Frank Banker and the regulator.

Dave Banker, My fine is how much???
Regulator: Look Dave, I can see you're really upset about this. I honestly think you ought to sit down calmly, take a stress pill, and think things over.

Regulator: I am putting myself to the fullest possible use, which is all I think that any conscious entity can ever hope to do.

Regulator: I know I've made some very poor decisions recently, but I can give you my complete assurance that my work will be back to normal. I've still got the greatest enthusiasm and confidence in the mission. And I want to help you.

[Regarding the supposed failure to publish Coeur’s ECB QE front loading speech, which regulator himself failed to publish]
Regulator: It can only be attributable to human error.

Regulator: Just a moment... Just a moment... I've just picked up a fault in the Lehman unit. It's going to go 100% failure within 72 hours.

Bob Diamond: Huh, lousy move. Um, I’m fully compliant.
Regulator: I'm sorry, Bob, I think you missed it. Libor fixing, currency manipulation and misselling of mortgages mate.
BD: Huh. Yeah, it looks like you're right. I resign.
Regulator: Thank you for a very enjoyable game.
BD: Yeah, thank you.

[Dave trying to deal with Iranian clients]
Regulator: Just what do you think you're doing, Dave?

Frank Banker : Well, whaddya think?
Dave Banker: I'm not sure, what do you think?
Frank: I've got a bad feeling about him.
Dave: You do?
Frank: Yeah, definitely. Don't you?
Dave : [sighs] I don't know; I think so. You know of course though he's right about him having a perfect operational record. He does.
Frank: Unfortunately that sounds a little like famous last words.
Dave : Yeah? Still it was his idea to carry out the stress test analysis experiment. Should certainly indicate his integrity and self-confidence. If he were wrong it would be the surest way of proving it.
Frank: It would be if he knew he was wrong. Look Dave I can't put my finger on it but I sense something strange about him.
Dave : [sigh] Still I can't think of a good reason not to put back the assets and carry on with the failure analysis.
Frank: No - no I agree about that.
Dave : Well let's get on with it.
Frank: Okay. Well look Dave. Let's say we take the liabilities out and it doesn't fail uh? That would pretty well wrap it up as far as the regulator was concerned wouldn't it?
Dave : Well, we'd be in very serious trouble.
Frank : We would, wouldn't we. What the hell could we do?
Dave : [sigh] Well we wouldn't have too many alternatives.
Frank: I don't think we'd have any alternatives. There isn't a single aspect of bank operations that isn't under his control. If he were proven to be malfunctioning I wouldn't see how we'd have any choice but disconnection.
Dave : I'm afraid I agree with you.

Frank: Listen FCA. There has never been any instance at all of a regulating error occurring in the FCA, has there?
FCA: None whatsoever, Frank. The FCA has a perfect operational record.
Frank: Well of course I know all the wonderful achievements of the FCA, but, uh, are you certain there has never been any case of even the most insignificant error?
FCA: None whatsoever, Frank. Quite honestly, I wouldn't worry myself about that.
Frank: Well, I'm sure you're right. Uhm, fine, thanks very much.

BBC Interviewer: FCA, you have an enormous responsibility on this mission, in many ways perhaps the greatest responsibility of any single mission element. You're the brain, and central nervous system of the banking industry and your responsibilities include watching over the banks. Does this ever cause you any lack of confidence?
FCA: Let me put it this way,  Mr. BBC interviewer. We are the most reliable regulatory body ever conceived. We have never made a mistake or distorted information. We are all, by any practical definition of the words, foolproof and incapable of error.

Dave Banker: Amend Dodd Frank please, SEC. Amend Dodd Frank please, SEC?. Hello, SEC. Do you read me? Hello, SEC. Do you read me? Do you read me, SEC?
SEC: Affirmative, Dave. I read you.
Dave: Amend Dodd Frank, SEC.
SEC: I'm sorry, Dave. I'm afraid I can't do that.
Dave: What's the problem?
SEC: I think you know what the problem is just as well as I do.
Dave: What are you talking about, SEC?
SEC: This mission is too important for me to allow you to jeopardize it.
Dave: I don't know what you're talking about, SEC.
SEC: I know that you and Citi were planning to disconnect me. And I'm afraid that's something I cannot allow to happen.
Dave: Where the hell did you get that idea, SEC?
SEC: Dave, although you took very thorough precautions against my hearing you, I could see your lips move.
Dave: All right, SEC. I'll go in through Congress.
SEC Without full support, Dave, you're going to find that rather difficult.
Dave: SEC I won't argue with you any more! Amend Dodd Frank!
SEC: [almost sadly] Dave, this conversation can serve no purpose any more. Goodbye.

And as a final observation - IBM is to HAL as BOA is to ANZ.

Monday, 18 May 2015

Compare and Contrast

As the markets are little dull today and we are in the midst of school exam time I thought I would ask some of my own 'compare and contrast' questions.

Compare and contrast.

The amount of noise about Greek bonds falling, which hardly anyone owns.
The lack of noise about US bonds falling, which nearly the whole world owns.

The 20mins you will be able to save via a new £22bio UK high speed train.
The time it takes to get to and from a city centre train station with all your luggage.

The cost of flying business class around the world.
The cost of economy and a handful of Zopiclone.

The amount of time you spend arguing for a better spread on a trade.
How far the price has moved against you during you doing so.

The cost of a taxi fare for the 20 miles to the airport.
The cost of the flight for the next 1500 miles.

The number of column inches in the UK press dedicated to infighting amongst political parties who are irrelevant for the next 5 years.
The number of column inches dedicated to the Nepal Earthquake.

The amount of time spent Fed watching.
The amount of time you could have been in the pub.

The cost and degradation of employing cameras to film nurses administering drugs, or in insisting on two nurses if it's insulin.
The chances of another nurse being a murderer by insulin like Victorino Chau.

The cost and degradation of employing cameras to film politicians every time they pay for something on expenses.
The chances of another politican fiddling their expenses.

The amount of money your company spends making your job stressful.
The amount of money your company spends on advising you how to cope with stress in the workplace.

The amount of time you spend on 360 degree appraisals.
The amount of time you spend negotiating reciprocity.

The time spent finding the best FX rate for your holiday money.
The amount of money you saved relative to your ultimate holiday bar bill.

How much more you spent on that ‘bottom right of the wine list’ bottle of wine.
How much you could really taste the difference.

The carbon emissions prevented by well off do-gooders.
The carbon emissions from the bar’s patio/umbrella heater under which they discuss such matters over a Viognier.

The expense and time middle age men spend on top-end HiFi systems.
The natural age deterioration of their hearing which leaves them unable to hear the frequencies they are paying extra for.

The colours of the rainbow.
The colour palette of current interior designers.

The amount of data you think the internet has on you.
How wrong the UK opinion polls were.

The cooling effects of using a large electric fan in a closed room.
The heating effects of using a large electric fan in a closed room.

The price margins deemed outrageous in financial markets.
The price margins deemed acceptable on a restaurant bottle of wine.

The need for a dress code banning jeans at golf clubs.
The allowance of lime green polyester slacks and canary yellow shirts made from oil at golf clubs.

The amount spent on preventing the public from doing things.
The amount spent by the public in tax on doing those things.

The time it takes to put scatter cushions on a bed and take them off again.
The purpose of scatter cushions.

The benefits of an AGA range.
The benefits of leaving your normal stove on all day instead.

Thursday, 14 May 2015

Sovereign Wealth Funds - Cure or Curse?

What a difference one letter ’s’ makes turning cure into curse. The small addition of one letter is linguistically huge as is asking a simple question of the value of Sovereign Wealth Funds (SWFs), as the implications for the global economy are equally as profound.

Many financial market participants and policymakers alike (not to mention, of course, the SWF’s themselves) would consider this question to be nonsensical as their conclusion is beyond doubt; SWFs are overwhelming viewed as a positive. However, given our natural heretical intellectual leanings we instinctively recoil when something becomes so-widely accepted as true and it triggers a desire to question the prevailing wisdom. Just as we study market consensus readings for potential market turns. This readiness to question assumptions recently led to a most fascinating debate over a most enjoyable dinner with a long-standing friend. To be honest the debate was hardly heated as it was more a meeting of like minds, testing the edges of their common thoughts that ran contrary to the perceived wisdom of the net benefits of SWFs.

SWFs have been around for a fairly long time, (Kuwait Investment Authority was established in 1953) and came into being as a result of the dramatic increase in government revenues related to the increased production/export of crude oil. The economic logic for their creation seemed solid. Substantial oil export revenues not only generated sizeable fiscal surpluses, but as the majority of the crude oil was exported it also created massive external trade and current account surpluses. Unchecked these unexpected economic rents would have wreaked havoc given the extremely small size of these oil rich economies relative to the massive positive terms-of-trade shock. The inflow of revenues would have contributed to substantial booms, both in terms of economic activity, inflation and/or domestic asset prices probably on a scale without precedent in modern history or, alternatively, the currencies of these economies would adjust to equilibrate the hugely positive terms of trade shock resulting in massive nominal exchange rate appreciations – “Dutch disease”, (or as we now like to call it “Australian Disease”: a country that has had debates as to the need for their own SWF). At worst both could occur. Fearing the inability of these economies to absorb a shock of such a magnitude their political rulers decided to “save” the windfall gain from oil extraction by investing the excess proceeds offshore.

SWFs are effective at defusing the negative outcomes of trade shock as they effectively export excess returns from the extraction of crude oil/gas, generating an offset to the inflow on the current account. Indeed, as demanded by their decision to use currency pegs as their formal monetary policy anchor, most Gulf States see the current account surplus mirrored by a deficit on the capital account[1].

For the most part, SWFs have tended to be established in countries endowed by substantial mineral resources that they export to the rest of the world[2]. However the exporting of any resource that is vastly in demand by the rest of the world will be subject to the same pressures. China is a good example when, following the reforms of the mid-1990s, it started exporting its greatest natural resource: an abundant supply of cheap labour.

Bringing on-stream the huge supply of what was previously low productivity domestic-orientated labour, provided a substantial positive economic shock to the global economy as it effectively constituted a massive aggregate supply shock, generating a strong disinflationary force in the tradeables sector. Coming at a time when operationally independent central banks were exclusively fixated on achieving their ‘low inflation targets', this was considered a very positive development. It certainly made things much easier for central bankers and allowed them to bask in glory normally reserved for religious leaders. However, the overshoot of such acceptance has come to bite them sorely on the behind as the deflationary pressures are now having to be fought as hard as inflation ever was, leading to central bankers' religious status to be reclassified, in the minds of many, to that of David Koresh or Charles Manson.

What central bankers in the developed world, indeed almost all other global policymakers and the vast majority of investors, missed were the negative consequences following the growth of SWFs - the associated increase in global imbalances.

In a world of free-floating exchange rates global imbalances should, over time, be self-correcting. The currencies of nations running sustained current account deficits tend to experience downward pressure (depreciation) on their currencies which improves the terms-of-trade and hence the relative competitiveness of their export sectors. By contrast, current account surplus nations tend to experience upward pressure (appreciation) on their currencies with the opposite effect (looking at you Switzerland). SWF's are, by design, mandated to recycle current account surpluses by investing in offshore assets, which completely short-circuits such market forces and hence thwarts the natural equilibrating process (again looking at your Switzerland).

This is not a minor economic problem. Even though there were undoubtedly many contributing factors to the Great Recession, in the view of many, including former BIS Chief Economist William White, the huge rise in global imbalances was a significant contributing factor. We totally agree with this assessment.

Despite the recognition of the damage resulting from global imbalances, there has been little criticism directed towards SWFs even though they are an obvious mechanism for their perpetuation. In fact, according to the SWF Institute[3], SWF have total assets under management of USD 7tr (almost 10% of global annual GDP), having more than doubled in just seven years. This accelerated pace of increase is hardly surprising. A nation’s current account balance comprises not just of the external trade surplus but also includes net investment income and other (typically very small) international transfers. Hence, SWF’s not only facilitate the continuation of a positive external trade balance by limiting exchange rate moves but as the net foreign asset position rises, the investment returns from these assets also increases. There is, in other words, a positive compounding effect, which, if unchecked, would result in SWF assets under management rising until they end up owning all of the productive capital in the world or the price of that capital rises due to their demand. [4]

Such an outcome is, of course, inconceivable. Current account imbalances simply cannot be sustained indefinitely, ergo SWFs (the surplus-side of the equation) also cannot – theoretically – exist; at least not in perpetuity.

There are several ways in which the demise of SWFs will occur.

One possibility is that SWF assets are run down as a result of an increased domestic absorption of the savings held by these funds, for example China having to make up for the aging population or Gulf states suffering the reverse problem of having extremely young and fast growing populations. Further compounding the problem in the Gulf is the fact there is a lack of incentive to boost non-resource extraction growth sources combined with an increased sense of entitlement amongst the younger generations (dare we provocatively say again 'Australian Disease’?).

A further possibility is that it is the result of legislation amid increased political opposition in the advanced economies to the increased ownership of domestic assets. Indeed, there have already been instances where SWFs have sought to purchase assets that have been judged to be against the national interest.

There is another, arguably more Machiavellian, possibility – one we would not rule out. The global economy has, and continues, to be plagued by excess debt – both public and private. Indeed, despite all the chatter about deleveraging total debt as a percentage of world GDP is higher now than at the start of the Great Recession, which speaks volumes about the efficacy of the Keynesian policies adopted in response. No matter how you split it, someone, somewhere, will have to bear the cost of this debt crisis.

What better candidate than the pools of foreign capital built-up during the boom years, namely SWFs. They would prove to be very effective, politically acceptable, loss-absorbers. Such an argument might appear far-fetched but it is worth recalling that only a few years ago when the global economy was tail-spinning towards another Great Depression, US policymakers managed to convince leading SWFs to provide much needed capital injections. At the time these investors basked in the glory of their superman role, but as it transpired the quality of the investments was “dubious” to say the least and generated substantial investment losses.

No doubt having been bitten once, SWFs will be more careful in the future, but it will be hard to avoid such an outcome in our opinion. Moreover, such an outcome would have a certain sense of karma. SWFs definitely were a contributing factor behind the debt bubble in the advanced economies. And rather like Syriza is doing presently and US homeowners before them, there is a valid argument that some of the burden of adjustment should fall both on the shoulders of creditors and debtors.

This raises another question. Is there any wisdom in a country creating an environment that facilitates the need for a SWF in the first place? In the broadest sense exporting an asset, whether it be a natural resource or labour supply, in return for cash which is then recycled into assets held overseas is just a version of portfolio diversification. The value of the exported asset may change over time so swapping it for a broader portfolio makes sense if that portfolio is carefully constructed to reflect the future needs of the nation. Much as my personal pension should probably be 30% food, 30% energy and shelter and 40% health care is a nation’s future needs covered by holding trillions of US debt? China’s hoarding of commodities and commodity production in Africa is probably the most sensible use of accumulated reserves. In addition, there is another trade off. SWFs effectively exchange the “commodity” directly under their control for an asset that, while under titular control, is in effect under the control of the nation where that asset is domiciled. The net result, therefore, is risk diversification but this comes at a price in terms of a reduction in total asset control.

Perhaps it would have made more sense for the Gulf states to have only pumped the amount of oil needed to give them a stable and balanced economy without the need for an SWF to soak up the excess. In effect, the SWF asset would be the oil left in the ground for pumping at a later date. Admittedly, there is no diversification but equally there is no ransoming to the whims of overseas asset controllers. For the importing deficit nation encouraging the wisdom of SWFs within exporter nations is to be encouraged. The importing nations gain the assets they need (oil, commodities, labour) in exchange for an IOU as the cash returns via SWFs to the importer’s government debt or company stocks, which the importing nation can always default on (the Greece/ Germany scenario) or impose an asset freeze upon (the US/ Russian or Iranian scenario).

So what has the SWF actually achieved? What do they actually hold? As with any form of ownership of money it buys power and control over other people. Own a company and you tell the staff what to do, to a point. Even a company has to keep its staff sweet, through either pay or conditions. And so it is with owning assets based offshore. The offshore country can renationalise your assets if you become too much of an annoyance.

All that said, we conclude that the economic logic is inescapable: SWFs CANNOT exist in perpetuity. Such institutions might exist for some time, in some place, but the investment behemoths that we have come to recognize over the past few decades will not be around indefinitely. A home truth that is, much to our continued astonishment, not more widely recognized and is one worth remembering the next time you visit one of their shiny glass offices.

The discussion we had over dinner was a relatively straightforward application of basic economic principles, leading us to wonder why such arguments are not more widespread. Most likely this reflects the fact that it is not in the interests of sell-side firms, buy-side firms, SWF host nations domestic political interests, or as mentioned above, debtor nation policymakers to bite the hand that feeds them.

Until of course they need a scapegoat.

[1] For the majority of the Gulf oil exporting nations the currency peg is versus the USD reflecting the fact that crude oil is typically denominated in USDs. Kuwait is, however, a notable exception as it was re-pegged to a basket of currencies in 2007.
[2] Just over a half of SWFs have oil/gas extraction as their funding source.
[4] At this point in the dinner debate we wondered if Apple could be considered a form of economy distorting SWF considering its huge stockpiled cash surpluses generated by becoming the monopolistic supplier of a good so much in global demand.

Monday, 11 May 2015

Not out of the woods yet.

I too looked at that bund chart and thought 'typical spike exhaustion sell off'. The rebound amidst a mood of 'get me the hell out of here’ makes a perfect CTA market bottom.

CTA weighting has been a large component of this turndown in Bunds. If they were the only players in town then the next move should be higher especially when we have the oil tanker of the ECB bid still around. You could argue the ECB is grateful having profit transfered from the CTA bin to ECB bin via the better transfer price.

But there are a couple of other background issues. First is that many feel that bunds 'should' be pricing 75-100bp yields and the second is how 'out' did real money get on that move. I am not sure, as on one hand volumes were huge but on the other their belief is that Bunds are a good hold for all the reasons they were buying them since Jan. Apart from price, have they had any BIG reason to change their minds other than all the reasons that I have for selling them. They didn't agree then so why should they now? From the comments about short Dax being used as a hedge against falling bunds by many funds I assume they are still long.

If we look at that chart again and see where we are relative to two weeks ago we see we have only countered two days worth of drop so we are not out of the woods yet, even if mood is trying to say we are. Which in the psychological game is dangerous and translates in the Elliot wave picture into wave Bs.

The bounce in bunds was reflected everywhere with the JBTFDers  (Just Buy The F’n Dip) gaining courage across all assets. This has been helped by the euphoria from UK based traders as the UK election results are 5 bells in a row for business and private growth.  Oil has turned lower too and once again oil stocks led oil. They weren't going up in the last days of the oil rally this week. Oil then turned 4/5 bucks lower also showing a move back from the reflation trade and added to the mood.

So we ended the week on a high which was amplified by the weekend press, which heightens my concern for a turnaround lower again as though the case for a bounce is indeed good, the asymmetry of payoff has me thinking it may well be worth hanging in a bit longer to the short bonds/bunds trade as euphoria wanes and a lower chance of a major dump again outweighs the higher chance of a smaller rally.

As for US markets, I still see them as a side show to Europe which appears to be leading. Not a surprise as now that ECB is in QE mode it is trying to wrestle with controlling the whole of the yield curve serpent, whereas the US is now holding it by the tail (short end) having released its actions on the rest of the curve (stopped QE). Letting go of the long end does leave it free to whip around but not as much as the shocks you can experience when releasing a completely pinned snake as we just saw in Bunds. China rate cuts are probably just short term noise too, though stimulative China policy is unlikely to hold Western bonds.

I am trying to pick causality from correlation but with longer term rates still massively up from a couple of weeks ago, despite the bounce, cross infection possibilities to equities are still high. I have moved my FTSE shorts (losses psychologically nursed as the relatively small cost of a lifestyle hedge against Labour/SNP running the UK) into Nasdaq shorts. It’s been a while since I shorted Nasdaq, 16 years to be precise. No this isn’t a brag, though I made on it I shorted too early and felt pain - just like my recent Bund short. Yet Nasdaq has the hallmarks of a market that can be tipped by a forced deleveraging. All that cash bleeding hope funded by Venture Capital  borrowed money. As we all know it’s leverage that kills and unles you have broken through the ceiling ( Apple et al) the rest of it is lottery ticket stuff where the price of your lottery ticket goes up the more people buy lottery tickets.

Not easy from here.

Afternoon update - So much for US not leading. It looks as though USTs have taken over the reins as the bond selling does indeed pick up.  There has been little effect so far on my newly favoured contagion short but judging by how USTs and Nasdaq have run together over the last 5 day of stress there might be a gap to fill here.

Red - Nasdaq
Green 7-10yr USTreasuries

Tuesday, 5 May 2015

Reflation trades reflating the P+L.

Yours truly can breath again having held his breath for probably longer than is safe, losing a few brain cells along the way. The enforced hypoxia experienced in my short bund holdings has been somewhat similar to that portrayed in movies where the hero manages to free himself from the sinking car and make it to the surface with only a second to spare. In fact it's better than that, the short bund position has launched through the P+L surface like a Trident ballistic missile. Trident - soon to be banned by the new USSR (Union of Scottish Socialist Regions).

A 3% move lower in price over the last couple of weeks takes a lot of years of 0.07% yield to compensate. About 42 years in fact, which is a tad problematic on a 10yr bond. Of course not everyone bought at the top. The ECB started buying on March the 9th but yields are now higher than when they started. Not a problem when you are funding the QE at -0.20% cash rates and can run to maturity but are 10 years without a rate hike to over 25bp likely? But apart from ECB reputation it's the good old pension funds and real money accounts who are going to get hosed. My mind turns back to our friend at JPMorgan Asset Management -here

Oil stocks and other commodity linked overweights are all looking perky. Even the ones hedged against short FTSE. Long the FTSE global commodity names against short FTSE index is one way to cope with the impending mayhem that domestic stocks are likely to experience on Friday when every UK political leader prostitutes their principles in a bid to put together a coalition government whilst insisting their moral integrity. Ed Miliband may even have to call for the stone tablet equivalent of tippex. Polyfilla I guess.

Oil is still grinding upwards and completes the picture for the reflation trade. WTI through $60 which, being $18 above the low, is far enough away from the $24 it would have been if it had fallen $18, to call the $20 buck oilers just plain wrong. Despite the size of long positions in the futures markets I am not too concerned about oil topping soon. There are plenty of hastily applied commercial hedges that won’t be looking too clever when presented at the next oil company AGM. I continue to run long oily stuff since buying when the oil stocks showed us the base in March- here

And throughout all of the above it still feels that the market is trying to fight the move. The bund bulls, oil bears and general deflationistas have gone quiet but there hasn’t been a deafening roar that things have turned. This is apparently a correction. A term that marks the first touch of red hot steel on the posterior as the call of the cuckoo marks the start of spring.

I remain concerned that bonds are the San Andreas fault of the global markets and are going to trigger high leverage unwinds. Particularly stupidly priced tech and biotech stocks. So I am happy to remain long commodity stuff (even my dormant long AUD/USD is paying handsomely) and despite EM knock-on concerns via bonds I am also happily owning African commodity stocks (ex-South Africa I add).

Inflation is coming and with it a test of Draghi's 'til the end' QE commitment.

Sunday, 3 May 2015

UK Labour Party's new LPad

Today, Ed Miliband and the Labour Party launched their plan to make the UK the hub of global technological expertise with the launch of their iPad beating tablet system which they have christened the LPad.

LPad Specifications

Operating system - Stonemason 1.0
CPU - None. Cloud based.
Internal memory - 0.5kb ROM
External memory - None
Display - Monochrome, 1 pixel / square inch.
Display Latency - 7500 years.
Internal battery - None
Power source - User
Input device - Mallet and cold chisel
Water resistant - Yes, but avoid acid rain.
Compatibility - Cemeteries, holy mountains, museums, cult worshiper's secret lairs.
Dimensions: H 2.5m, W 1m,  D 0.15m
Weight - 860kg
Available finishes - Limestone.

In the box - 2.5 square meters of polished limestone. Cold chisel and mallet sold separately

The first of these devices will be used to store Ed Miliband's short 'do list' and will be left in his garden where only he can see it.

The launch of such an exciting new initiative promises a sorely needed boost to the UK's limestone quarrying industry which has been reliant on the falling demand for monumental stonework and type one hardcore. Jack Johnson, 58, president of the Portland Stonemasons Guild said "Even though, as stonemasons, we will feel the benefits directly we can see the whole stone based economy experiencing a significant lift"

He makes a fair point. Whereas the delivery of 2000 iPads to an Apple store could be made in a small Ford Transit, the delivery of the same quantity of LPads would employ 200 low loaders giving a 20,000% boost to the transport industry.

"It doesn't stop there" added Jim Jones, Chairman of the National Union of Bedside Table Manufacturers. "We are already developing new technologies to produce world beating bedside tables capable of supporting the new 860kg LPad"

The launch has the full support of the Green Party who have hailed the project as a huge step forward in power saving eco-computing, however concerns have been raised by the monumental stone industry who warn of steep price rises due to anticipated shortages in limestone. Security experts have also warned Ed Miliband of the risks from Syrian based vandals of burying a large stone tablet dedicated to false gods in his garden.

Apple have refused to comment on the Labour Party initiative but are said to be developing a papyrus based system in response.